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Document 1

PRICE MECHANISM IN OTHER COUNTRIES1

The basic concerns of the governments all over the world in respect of drugs and

pharmaceuticals has been to ensure abundant availability at reasonable prices of qualityproducts. The systems of regulation of drug prices in many countries has been adopted to

control their health care spending. These systems have attracted attention as possible

models for the regulations of drug prices in India also. Therefore the committee in its

deliberations decided to visit some of the countries to study the prevailing systems inother countries. The Committee, in two separate groups, visited USA, Mexico, Canada,

France and Egypt. In addition, the relevant material/studies were also collected for other

countries. A synopsis of the systems prevailing in different countries is given below:

CANADA

Pricing

Canada has a unique system of controlling the prices of patented medicines that are sold

in Canada. Towards this end, Canada has set up the Patented Medicines Prices ReviewBoard (PMPRB). The mandate of the PMPRB is:

(a) To ensure that the prices of patented medicines charged by patentees are notexcessive. All patented medicines sold in Canada are covered by the

PMPRBs price fixation jurisdiction.

(b) To report annually to the parliament on its activities and on the pricing trendsin the pharmaceutical industry, and;

(c) To report annually on research and development expenditure by the patentedpharmaceutical industry and on the ratios of R&D expenditures to sales forindividual patentees.

Prices of only those patented products are fixed which are charged by the patentee

usually to a wholesaler or directly to a hospital or a pharmacy.

The PMPRB differentiates between New and Existing drug products. A new drug

product is one for which the introductory price is fixed. Drug products are considerednew in the year during which they are introduced in Canada. Existing products are those

for which a benchmark price has already been fixed by the PMPRB. New drug products

are categorized into three broad categories, namely, a breakthrough drug product, asubstantial improvement drug product, and a moderate improvement drug product.

For the existing drugs the PMPRB while fixing the price follows either the Reasonable

Relationship Test (RRT) or the Therapeutic Class Comparison (TCCT). Under the RRT,

1 Reproduced from Chapter III of the Report of the Drug Price Control Review Committee, Dept ofChemicals and Petrochemicals, New Delhi, October 1999. Hereafter referred to asDPCRC Report, 1999.


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it considers the association between strength and the price of the same medicine in the

same or comparable dosage form. In the TCCT, it compares the price of the drug under

review with the prices of the drugs that are clinically equivalent and are sold in samemarket at prices approved by the Board. For the new drugs, the PMPRB follows the

International Price Comparison (IPCT). Under this, the price of the drug product under

review is compared with the simple average of the ex-factory prices of the same strengthand dosage form for each country listed in the PMPRBs regulations, which are; Germany,

France, Italy, Sweden, Switzerland, United Kingdom and United States of America.

When a direct comparison of the drug product and the review is not possible for a given

country, the most similar strengths of comparable dosage form are considered. Themedian of the prices prevalent in these countries which would generally be the simple

average of the middle two prices is normally adopted by the PMPRB as the price for the

said product. Once fixed, the price continues as long as the product remains under patentand is allowed to be adjusted with the changes in the consumer price index. Thus in

Canada, apart from fixing the prices, the Board also monitors prices of new products to

determine whether they are reasonable. If products prices are found to be excessive, the

companies may be asked to lower the prices, pay fines or return excess revenuescollected.

Health Care System

Canada has a publicly financed, privately delivered health care system known to

Canadians as Medicare. The management and delivery of services is the responsibility ofthe provinces and territories. The federal governments responsibility is limited to

providing services to specific groups such as veterans, setting national standards, and

assisting provincial health care services through fiscal transfers. The system is financedthrough taxes and employee/employer insurance premiums. The provinces must provide

comprehensive coverage to everyone. Health services are delivered by the private sector;

most physicians are private practitioners and over 95 percent of hospitals are operated asprivate nonprofit entities.

Reimbursement

All health care services provided by physicians, most medical laboratory tests, and all

that is provided in hospitals procedures are covered for reimbursements. The

reimbursement of non-hospital-prescribed drugs is based on the different provincial planswith eight provinces providing universal coverage with varying levels of co-payments

and two provinces cover only the elderly and welfare cases.

Other Cost Control Measures

The main mechanism is the control of patented drug prices, as described above. Some

provinces, such as Ontario and British Columbia, have instituted other measures, such asgeneric substitution, price freezes, and reference pricing.


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FRANCE

Pricing

Once a product is granted market authorization and approval as a reimbursable product

by the Transparency Commission, it is referred to the Medicines Economic Committee(CE M). The Committee sets a reimbursable price after negotiations with the

manufacturers. For fixing the consumer price, the Committee does not carry out a cost

study as is done in India. However, the prices are worked out using several criteria,

including internal comparisons with existing products; therapeutic merit; and contributionto the domestic economy. In additon, for the drugs that account for a significant fraction

of expenditures, an Envelop Globale applies, a comprehensive revenue limit which

means that if the revenue is higher than targeted, the price is cut to bring down thegovernment total spending on the drug within the target.

For the reimbursable drugs, margins for the wholesalers and the pharmacists are

controlled. The price before tax, of reimbursable medicines, is the sum total of themanufacturers price before tax negotiated between the company and the CEM, the

wholesaler margin (which is 10.74% of the manufacturers price before tax) and the

Pharmacists margin (which varies from 8.26\8% to 44.83% of the manufacturers pricebefore tax). Added to this is VAT of 2.1% for reimbursed drugs and 5.5 percent for non-

reimbursed drugs is also considered.

The Government of France has adopted a cost cutting measure by adopting a deliberate

policy of encouraging generic prescriptions. Doctors are expected to prescribe at least

15% generic drugs. The prices of generic drugs are kept 25% to 30% below the originalproduct prices. 91% of the sale of medicines through retail Pharmacists in France is on

the reimbursable list.

The system of controlling consumer prices through the reimbursable list and provision of

encouraging generic prescriptions have reported not retarded the growth of the

pharmaceutical industry. In fact, both have worked in a cohesive way to provide modern

medicines at affordable prices.

Health Care System

The French health care system covers the entire population. It is funded by

employee/employer contributions (74% and patient co-payments 26%) Patient co-

payments are paid either by private insurance companies or by nonprofit insurance plans.

Reimbursement

Using a number of criteria, the Transparency Commission decides whether the drug iseligible for reimbursement. Once it is accepted, the Economic Committee on Medicines

decides the actual reimbursement price. Companies have to provide detailed data on


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costs, sales, and investments. The reimbursable products are distributed into three

categories:

(a) Hundred percent reimbursement granted for certain products like life saving

drugs and very expensive medicines.

(b) Sixtyu five percent reimbursements granted for products intended fordisorders and diseases that are not very serious.(c) Thirty five percent for most of the other products

More than 90 percent of the sale of medicines through retail pharmacists are, thus,included in the reimbursement list.


The patient has to pay the amount that is not reimbursed, although many segments of the

population are exempt from this co-payment requirement. Primary care physicians are

given prescribing guidelines and asked to limit the growth in total reimbursement. Thereis a tax on promotional spending by pharmaceutical companies. The tax varies between

9% and 20%, depending on the proportion of sales revenue spent on promotion (the

higher the proportion, the higher the tax). The government enters into contractualagreements with the pharmaceutical industry to make sure that the government health

insurance funds do not exceed an annual ceiling on health expenditure, including

spending on pharmaceuticals. If the budgets are exceeded, pharmaceutical companies areasked to make a collective contribution toward the health care budget deficit (1996).

Such payments take the form of taxes on advertising, taxes on sales, and taxes on

extraordinary sales increases.

EGYPT

Health Care System

Egypt has created an unified Drug Control Authority (DCA) that regulates the industry in

technical, quality control, production, distribution as well as pricing matters. In Egypt,the distribution of locally manufactured and imported drugs is undertaken both in the

public sector and through the private distribution channels.

The Government distribution network which is being operated through the Egyptian

Pharmaceutical Trading Company is very well organized and reaches down to the

community level even in remote areas. The Government supply chain is also used forsubsidizing certain medicines as per the Government policy. There are more than 20,000

retail/pharmacy shops distributing the medicines to the consumers. All shops are

licensed and have to have pharmacist to dispense medicines.

Pharmaceutical Pricing


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All medicines sold are subject to price control at manufacturer and consumer levels. The

manufacturer prices are fixed after doing cost studies of the medicine, the details of

which are submitted to the Government by the manufacturers. On the cost of rawmaterial and packing material a margin of 30% is allowed towards administrative costs

which are basically the manufacturing cost. A profit of 20% is allowed to the

manufacturer for the locally manufactured products. On the imported drugs a margin of12% as profit is allowed. 11% is allowed on marketing cost on the ex-factory price.

While fixing the consumer price, it is ensured that similar drugs are similarly8 priced.

The profit of the wholesalers are regulated at 7%. The retailers are allowed a profitmargin of 20% in the consumer price fixed by the Government. To ensure that imported

items are not overpriced, there is a departmental Committee that determines the

reasonableness. In Egypt, there are presently around 4000 approved medicines. It istheir policy not to allow unnecessary formulations packs and dosage forms to be

produced or sold.

Other Measures

It is a Government policy to restrict the number of manufacturers of medicines. Only 4

to 5 units are allowed to manufacture a drug for which the government fixes the prices.In case a sixth company wants to manufacture and sell the same drug, it will be permitted

only in case it accepts to sell the product at least on an average 30% below the price of

others.

MEXICO

Health Care System

Every drug and pharmaceutical that is marketed in Mexico has to have a marketingapproval and the concerned company is required to register its products with the Ministry

of Health. The manufacturers\ also needs to comply with other regulations related to

price, patents, etc. stipulated by the various departments of the government. In order to

register a product in Mexico, a drug has to comply with safety, efficacy, purity, stabilityand quality standards laid down by the national and international agencies, as provided in

the law.

In Mexico, about 70% of the total population is covered through various social security

schemes. While the security and Social Services Institutes for Estate Workers (ISSTE)

provides health cover to the employees of the government, the Mexican Institute ofSocial Insurance (IMSS) provides the required cover to the workers and their families.

Further, mobile doctors periodically visit the villages having population of 500 or less to

dispense the required medicines free of charge. A proper system of registration of herbal

preparations is also in position. In rural areas, adequate freedom is given to thepractitioners of indigenous systems. Use of Homeopathy is also regulated and some

prestigious institutions are engaged in imparting education and training in the respective

areas.


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In view of the freedom given to the companies with regard to the pricing of their

products, greater thrust is being laid on expanding the coverage by various social securityand insurance scheme. Gradually the health care enforcement is shifting into the hands

of the insurance companies. However, at the same time the Mexican government has

taken steps to reinforce the social security system and to increase the coverage undervarious scheme of the system.

Pricing

All the Pharmaceutical products are subject to price fixation by the government. A

highly flexible system of pricing is being followed, mainly baed on the details given by

the individual companies. This system takes into account factors like investment,production performance, sales level, inflation, exchange rate etc. The Ministry of

Commerce and Industrial Development (SECOFI), which looks into the pricing aspect of

pharmaceuticals, examines the details as furnished by the companies. However, no

rigorous scrutiny of these details, and the price as claimed by the company in undertaken.

Prices of new products are fixed at the level requested by the Pharmaceutical company in

certain situations like if there are no similar products or the generic is available in non-comparable pharmaceutical forms, products for which generics exists in the market but

(can sustain a new therapeutic application) have a better side effect profile, or provide

advantages in its application, in the case of products which have been reformulated withthe corresponding authorization of the Ministry of Health, they are considered as new

products.

Since the liberalization in 1990-91, prices of pharmaceuticals have reported risen

between 50-100% in 1994. It was observed during the visit of the team in June 1999 that

the pharmacies were selling medicines at widely publicized discount of 25 to 30% whichindicates the liberal and arbitrary fixation of the prices of medicines in that country. A

considerable difference in prices of branded and generic formulations manufactured by

the same/different companies was also observed in Mexico. However, mostly single

ingredient formulations are encouraged which, in turn, ensures rational use of drugs.

The manufacturers selling price varies depending on whether the products are sold

through the public or private sector. In the price fixed , the manufacturer retains a marginvarying between 7 10%. The wholesalers margin is 18.5%. There are two different

mark-ups for Pharmacists One for pharmaceuticals launched before February 1975 and

one for pharmaceuticals launched after that date.

Price Structure at Retail Level

A B

Manufacturers selling price 100.0 100.0

Wholesalers selling price 118.5 118.5

Pharmacists selling price 140.2 140.2


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A = products launched before February 15th

, 1975

B = products launched after February 15th

, 1975Source: IMS Mexico Pharmaceutical Index.

ITALY

Health Care System

A comprehensive national health service covers the entire population. The system is

funded mainly by general taxes and co-payments.


Companies are free to set prices for prescription drugs that do not seek reimbursement:

prices of reimbursed drugs are controlled. Reimbursed generics have to be priced 20percent below the original. OTC prices are not controlled. For reimbursed products, the

wholesaler margins is set at 10 percent of the manufacturers price. For products

approved through the centralised EU procedure, the wholesaler margins depend on theprice of the products. Pharmacy margins for reimbursed products are set at 40% of the

manufacturers price. VAT is 10 percent.

Reimbursement

The reimbursement price of prescription drugs can be no higher than the European

average, which was historically calculated on the basis of the average price in France,Germany, Spain and the U.K. A new system of average prices baed on a 12-country

comparison has recently been adopted. Drugs are placed in one of three classes that

determine the level of reimbursement (0 percent, 50 percent, 100 percent), depending ontheir efficacy and need. Products are removed from the reimbursement list if their prices

are raised above the European average level. Prices of products that are not reimbursed

can be raise once a year.

Other cost Control Measures

Depending on the drug category, patients may have to pay 50 percent of the price. Theyalso pay a flat co-payment for every prescription. Some groups are exempt from co-

payment requirements. There is an annual global budget for pharmaceutical

reimbursement. Primary physicians have some prescribing guidelines. Genericsubstitution (substituting one generic for another) is permitted under certain conditions.

GERMANY

Health Care System


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The health care system is decentralized with 700 self-governing non-profit insurance

funds (called sick funds) financed by employee/employer contributions. Sick funds must

accept everyone for coverage. A part of the population (about 8 percent) whose incomeexceeds a certain level is allowed to buy private insurance.


Companies are free to price prescription drugs and generics, but reimbursement is

controlled. Companies can change their prices freely. Wholesaler and pharmacy margins

are fixed by law and depend on the ex-factory price of the drug. VAT is 16 percent.

Reimbursement

Once a drug is approved, it automatically qualifies for reimbursement, unless it has been

specifically excluded. Prices for reimbursed drugs are controlled by reference pricing.

Drugs are put into a reference class on the basis of therapeutic consideration; all drugs in

a class are reimbursed at the same level. Patients pay the difference between thereference price and the market price. Since 1996, all on-patent drugs have been exempt

from reference pricing. Reference prices are reviewed every year.

Other Cost Control Measures.

Patients have to pay a fee per prescription which is dependent upon pack size, althoughsome groups are exempt from this requirement. In 1993, global budgets have been

replaced by indicative budget for individual practices although global budgets were re-

introduced in late 1998. Generic substitution is legal if permitted by the prescriber.Because of the historically high consumption of branded drugs compared with generics,

the government has also made a conscious effort to encourage generic use. This allied

with budget constraints on physicians has led to a market in which in 1998 more than40% of prescription were for generics.

JAPAN

Health Care System

Universal medical coverage is part of the social security system. Most of the revenue forthe system (approximately 90 percent) come from general taxes and employer/employee

health insurance funds and the rest is paid directly by patients. The health care system is

characterized by universal coverage, free choice of health care providers by patients andfee-for-service payment to service providers. Hospital and clinic physicians may sell

drugs directly to patients.


The manufacturers prices are not directly controlled, but reimbursement prices are set,

effectively acting as price controls. Companie have to sell to wholesalers who supply to


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the national health system at a set discount; the wholesaler has a markup of

approximately 4 percent.

Reimbursement

Almost all prescription drugs are on the reimbursement list. The reimbursement price ofa new product is determined by comparing it with similar products on the list. The price

allowed depends on the products relative efficacy, safety or usefulness. If the drug is

innovative, a premium of upto 30 percent is allowed; if it is useful, a premium of upto

4.5 percent is allowed; if it is a generic, it h as to be priced at least 10 percent lower thanthe originator drug. If there is no similar drug on the market, the price of the product in

other developed countries and the cost of manufacturing may be taken into account.

Price are revised every two years (although annual revisions have been made recently).Price revisions are based on the reasonable zone (R-Zone) method; prices are revised

by the amount by which the reimbursement price deviates from the actual discounted

market price (the R-Zone is currently 5 percent). Price cuts maybe mandated if the sales

of the drug exceed expected sales targets. Since doctors receive the reimbursement price,they can profit from whatever discount they get from wholesalers.


The Government is considering additional measures such as cross-country comparisons

and reference pricing.

UNITED KINGDOM

Health Care System

The National Health Service (NHS) provides universal health coverage. It is funded by

general taxation (96 percent) and patient co-payments (4 percent). Patients have to

register with general practitioners (GPs), who control access to specialist. GPs are

organized in groups and paid by capitation. There is ma move toward primary caregroups, which consist of 50 or so GPs providing mot health care services.


The prices of branded prescription drugs are not controlled at launch. Generic prices are

controlled the price is set at the level of the weighted average price of the mainsuppliers. OTC pricing is not controlled. Prices may be lowered at will, but price

increases are restricted to the products of companies whose profits fall more than 25

percent of allowed profits. For sales to the NHS, wholesalers get a mandated 12.5

percent discount from the manufacturers price. Pharmacies get a flat dispensing fee perprescription and are reimbursed at the wholesalers list price (hence it is in their interest

to negotiate the lowest price from the wholesalers). VAT is 0 percent for NHS

prescriptions but 17.5 percent for OTCs and private prescriptions.


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Reimbursement

All drugs are reimbursed, unless they are on the negative list, which consists of products

in eight therapeutic categories. Prices of drugs are not directly controlled through price

increases are.


The major form of market interventions is the pharmaceutical price regulation scheme(PPRS), which regulates companys profits on sales to the NHS. Maximum profits are

negotiated on a company-by-company basis and are based on the rate of return on capital

in the U.K., investments in the U.K., and level of long-term risks. Companies whosesales exceed their capital employed by a factor of 3.75 are granted a maximum return on

sales. Companies that exceed their maximum return on capital or return on sales have to

reduce their profits by repaying the excess in cash or lowering existing and future prices.

GPs who belong to fund-holding or primary care groups have global budgets provide allservices. Spending is tracked monthly by the prescription analysis and cost (PACT)

system. Most patients are charged a flat fee per prescription, or they may pay a certain

amount per year for an unlimited number of prescriptions. Generic substitution is illegalbut the use of generic is on the rise. Promotional spending is limited to a percentage of

ssales to the NHS.

SPAIN

Health Care System

The national health care service provides universal coverage. It is funded by general

taxation (50 percent), social security contributions (22 percent), co-payments and otherout-of-pocket expenses.


Launch prices of prescription drugs are controlled. Prices are set using a host of factors,

including cot of production, profit allowance and anticipated volume of sales. The profit

allowance is set by company. A reference-price ystem is being worked on formultisource drugs with the same ingredient, strength and dosage forms. Generics are

priced 25 percent - 30 percent below the originals. OTCs are not controlled.

Wholesalers margins are set at 12.4 percent and pharmacy margins are set at 43.5percent of the manufacturers retail price. VAT is 4 percent.

Reimbursement

Reimbursement is controlled and is based on a number of factors related to therapeutic

value. Prices of all drugs on the reimbursement list are set. Reimbursement may be

refused if other, cheaper drugs are already on the market. Reimbursement prices may be


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changed if the change is justified by the manufacturer. In the past, the Government has

mandated across-the-board price cuts and price freezes for all drugs on the

reimbursement list.


Companies can be asked to return a part of their reimbursement sales to the Government.

For reimbursed drugs most patients pay 40 percent of the cost. Health care centers have

global budgets covering all forms of treatment. Autonomous regions may have

additional cost control policies. Doctors prescribing behaviour is monitored and highprescribers may be warned. Pharmacists may substitute one generic for another.

Promotional expenditure for a product is set at 12-14 percent of the manufacturers

selling price.

THE NETHERLANDS

Health Care System

There is a national system of health care, but different parts of the system are financed in

different ways. Serious illnesses and disabilities are fully funded by the Governmentthrough general taxes and income-related payments. Acute care is funded by semipublic

sick funds; people with incomes exceeding a certain amount can opt for private

insurance.


For prescription drugs and generics, the maximum manufacturers price is the average of

the prices in Belgium, France, Germany and the U.K., taking into account the impact of

parallel imports into these markets. OTC prices are not controlled. Prices are revisedbiannually as the prices in the reference countries fixed. Pharmacies are paid a fixed

dispensing fee per item. VAT is 6 percent for prescription drugs and 17.5 percent for

OTCs.

Reimbursement

Listing for reimbursement is based on therapeutic and clinical grounds. Drugs that areclassified as being unique therapies for hitherto untreatable diseases can be priced by the

manufacturer, though few such drugs have been recently admitted to the reimbursement

list. Reimbursement limits for other drugs on the reimbursement list are based on areference pricing system based on the WHO defined Daily Dosage. The maximum

reimbursement limit for a class of drugs is based on the price of the product priced just

below the average price. Generic prices are taken into account in this calculation.

Reimbursement status and limits are not reviewed in a periodic or systematic way.



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Most patients have to pay 20 percent of the cost of all outpatient care, including

prescription drugs, upto a maximum level. There are indicative budgets prescribing

guidelines for general practitioners. Generic substitution is permitted with the consent ofthe physician and the patient.

SWITZERLAND

Health Care System

The different cantons (sates) largely decide health policy, though insurance and thesupply of drugs are federal responsibilities. Health care is financed by sick funds and

private insurance firms (67 percent), general taxation (5 percent) and co-payment (28

percent). An increasing proportion of the population is insured by private insurancecompanies and managed care organizations.


Manufacturers are free to set prices for prescription drugs except for those on the

reimbursement list. Generic prices must be below 25 percent of the original if they are to

be reimbursed. OTC prices are not controlled. Prices of non-reimbursed products can bechanged freely. Wholesalers margins rnage from 11.1 percent to 17 percent, depending

on the price of the product. Pharmacy margins range from 70.6 percent to 26.1 percent.

The margins of OTCs are not controlled. VAT is 2 percent.

Reimbursement

Admission to the reimbursement list is based on a number of factors related to efficacy,

need and cost-effectiveness. Reimbursement prices are set by factoring in considerations

such as prices in the country of origin, prices in other European countries (Denmark,Germany, The Netherlands) and innovativeness of the drug. Foreign imports are allowed

an additional premium of 25 percent to compensate for transaction costs. Reimbursement

status and prices are guaranteed for 15 years.


Most patients have to pay out of pocket upto an annual deductible amount. After that,they have to pay 10 percent of all medical costs, including those for pharmaceuticals,

upto a limit. Some cantons monitor physicians prescribing patterns. Generic

substitution is illegal.

UNITED STATES OF AMERICA

Pricing

The prices of pharmaceuticals in the United Sates are, by and large, regulated by market

forces. The pharmaceutical companies are free to price their products, except that any


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sales to the government (Medicaid) must be at a specified discount to the market price.

Although Price Control is an anathema to the pharmaceutical industry in the US, there

is, however, a growing concern among the opinion leaders and public regarding the highprice of drugs. There has been an ongoing debate in the US Congress with regard to high

cost of health care and the issue of high price of drugs has formed a very important part

of such debates. A growing need is being felt to manage prices of pharmaceuticals atreasonable levels for the consumers. President Bill Clintons Health Security Act has

proposed an Advisory Council on Breakthrough New drugs to evaluate the

reasonableness of the prices of new drugs. Reasonableness was to be evaluated based on

several criteria, including cost and international comparisons, based on the lowest priceof the group of more than twenty countries. If a price is deemed unreasonable, the drug

could be denied reimbursement under public programmes. Thus, under such a system the

manufacturers are required to strike a balance between high per unit profit with lowturnover and a reasonable profit on high turnover.

A difference in the prices currently offered by manufacturers exists between institutional

(hospital/long-term care facilities) and community pharmacies. These differentiallypriced drugs are to be sold to the patients and employees of these institutions only and

are not allowed to be sold to the general public under an Act. A noteworthy feature is

that despite the absence of price control, cases have been filed in courts against thediscriminating prices offered by the drug manufacturers to such managed care companies,

as these special prices were not offered to communities/pharmacies. But the pharmacies

have agreements with the various insurance companies who reimburse the cost of eachdrug as per the agreed terms. Thus, there is no retail price fixed by the manufacturers

and each pharmacy can sell a drug at its own price subject only to the agreement with the

insurance companies. The price reimbursement for each drug also differs from oneinsurance company to another even for the same pharmacy. Further, some surveys

conducted by the local body in New York brought out that the price of the same medicine

different widely in the nearby pharmacies in the same locality. This is contrary to thebasic principle of competition where prices are not allowed to vary significantly.

To the wholesaler, sale by the manufacturer is made on the basis of the average wholesale

price plus a margin of around 2%. The pharmacy gets a margin of around 15% plus afixed charge of around 1.5 USD. The manufacturers offer higher discounts for greater

volume of sale to the pharmacies.

Health Care System

By and large, all the citizens of the United States of America are covered by HealthInsurance Schemes. Such insurance coverage fall into two categories; namely, those

provided by the private insurance companies, those provided by government programmes

(Medicare, Medicaid). However, the health care system in the U.S. is managed mainly

by private companies, in terms of both funding and service provision, though there arepublicly funded programmes that provide health care to certain segments of the

population. Care for the elderly is covered by Medicare, entitlement program that

reimburses many medical benefits but currently does not include a comprehensive


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outpatient benefit. Care for the poor is provided via Medicaid which includes

comprehensive drug coverage. Additional publicly funded schemes cover defense

personnel and war veterans (Veterans Administration). The private health care systemconsists mainly of health maintenance organizations (HMOs) and other forms of

managed care organizations, which are financed primarily through employer/employee

by cash paying patients, this share is declining as third party payers expand, particularlyin the government sector. Further Co-payments are almost universal with increasing use

of tiered co-payments to steer demand towards generic or on-fornulary drugs (for which

the managed care organization has usually negotiated a manufacturers discount).

Of late, there has been a shift towards managed care from merely payment for services.

This managed care includes inculcating health habits and provision of facilities for rest

and recreation, games, anti-smoking and anti-drinking clinics. In the USA, privateinsurance being a business activity, there is always a conflict between cutting costs to

increase profit on the one hand and on the other, the need to provide efficient and

satisfactory services to attract more customers. Most companies, especially those

providing services at the lower end appear to place severe restrictions on the drug costs toreimburse, the number of dys of hospital care, and a variety of similar cost cutting

strategies. Such measures are some times resisted by the beneficiaries and certain

changes have been effected in the relevant Act. Therefore, the managed health caremechanism is still in the nascent stage and will take some more time to gain the

confidence of the public.

People, who are not covered either by the private insurance or by the Government

managed health schemes, have to pay from their pockets. The affordability of drugs for

these people is a serious problem as there is neither a fixed price for any drug nor is thereany system for determining a fair-price, with manufacturers supplying their products at

different rates to different entities.

INDONESIA

Pricing

Although pharmaceutical prices are not directly controlled in Indonesia, however, the

intended price of a product including cost calculations has to be submitted with the

application for registration. Pharmaceutical companies are required to explain any largeprice differentials between the Indonesian price and the price in other countries. If the

explanation is unsatisfactory, the Food and Drug Control Division (FDCD) can refuse

registering the said product.

There are no official regulations on pharmaceutical mark-ups and discounts. However,

the Food and

Drug Control Division determines a maximum Pharmacists selling price for each productbased on the manufacturers selling price, which effectively limits the pharmacists mark

up. The maximum pharmacists selling price has to be displayed on the packaging of

each product and the list of maximum prices product wise have to be displayed in each


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pharmacy. Retail prices for products on the essential drug list, are fixed by the Food and

Drug Control Division.

At the distributor and the wholesaler level, profit margins vary according to the nature of

the products, i.e. for imported and indigenously manufactured respectively. The

indigenously manufactured products are sold with a list price known as net price to theapotik. The distributor/wholesaler mark up is about 20 percent. For imported goods

when the importer is also the distributor and wholesaler, the mark up on landed cost

varies between 20 percent and 40 percent. However, when the importer does not perform

wholesale and distribution functions, the mark ups at each level of distribution after thegoods leave the importer follow practically the same pattern as local products.

Changes in prices have to be notified on the Food and Drug Control Division of theGovernment of Indonesia and the said division has the power to ask for justification from

the companies in case the price increase is considered to be excessive.

VAT at 10 percent is imposed on the manufacturers selling price and the distributorsselling price for all pharmaceutical products except those included in the essential drugs

list.

COLOMBIA


Colombia started to implement total control over drug prices in 1968. Since then, price

regulation has gone through a number of phases and forms. Recently the scheme waschanged to combine freedom for a wide range of products with price control for a limited

number. Since 1992, essential drugs with fewer than five suppliers and so-called critical

drugs (in total about 20 percent of the market) have been subject to monitoredfreedom under which the producers or imprters can change the maximum selling price

to the public, but must inform the Ministryof Development in advance of a price change.

The Ministry can require manufacturers to present cost analysis in support of price

increases and can also override the producer and impose the price level if it deemsappropriate.

One of the reasons the scheme was changed was that significant differences in prices forthe same product occurred as manufacturers submitted different cost justifications.

Furthermore, the manipulation of periodic price adjustments by the Ministry of Health

introduced a political element and sometimes led to conflict between the producers andthe authorities. Those products with prices that did not keep up with inflation often

disappeared from the market, creating artificial scarcity.

In 1994, however, the Colombian Government dropped the experiment with monitoredfreedom and returned to a system whereby prices to the consumer for monitored drugs

had to be less than 3.4 times the production cost of the drug. The principal reason for this


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turnaround was lack of government capacity to follow up price changes under monitored

freedom.

CONCLUSION

A study of various countrys pharmaceutical industry profile has shown that there is a

system of pharmaceutical price management, whatever may be the name given to it.

Even in the countries that are votaries of a free market economy, when it comes to

medicines, there is a system of checks and balances existing in such countries. Medicinesbeing an essential commodity combined with ignorance of the common man of the

benefit-risk profile of a drug price management/control becomes not only essential but

inevitable as a tool of public policy for consumer protection.

Marketing approval for every drug whether imported or indigenously manufactured and

registering them with the appropriate government authority has been accepted as a

fundamental requirement for every pharmaceutical product. Countries have adopted thesystem of reimbursement pricing, reference pricing, patented product pricing etc. in order

to put a moratorium on the prices of pharmaceutical products that can be charged. In

some countries, a cap has been put on the margins allowed to the wholesalers andpharmacists. A comparative position is displayed by a bar-chart enclosed herewith

(exhibit 3.1). Further, the declining trend in price in different countries after initial

launch over a period of time, is shown in a graph (exhibit 3.2). In others, registration ofprices is insisted at the time of seeking marketing approval. Further, there are various

systems of ensuring reasonable health cover either by the public funded programmes or

through the private companies in the health and insurance sectors.

India is on the threshold of the product patent regime in the pharmaceutical sector. The

price control system that is adopted today will have to necessarily take into account thechallenges and conditions that will be created in India after the introduction of product

patent. With the reduction in trade and tariff barriers, India has moved closer to other

countries of the world. With the introduction of product patent, new and monopolistic

products are bound to hit the Indian market from all over the world. Since the consumerpatients in this country are not covered by any social security system, as is in existence in

many of the developed countries, the need of making available the latest drugs, many of

which would be patented with exclusive rights to the patentee, at affordable prices wouldbecome imperative. In this scenario the experience and system as adopted in various

countries of the world could be considered with necessary modifications to suit our

conditions. The following would, however, need to be ensured in this regard:

(i) Adequate availability of the required medicines at reasonable prices.There is steady growth of the generic drug (off patent) industry, which

today caters to almost the entire Indian market and is owned by the Indianas well as multinational companies. In this background, pricing of (a)

drugs with inadequate competition and (b) patented products would ensure


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growth of Indian drug industry as well as catering to the medical needs of

the consumers.

(ii) As a medium and long term strategy, adequate health insurance cover bothby the public and private sector needs to be provided so that the

dependence on price control measures could progressively reduced.


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Document 2

PRICING AND PRICE CONTROL OF DRUGS AND PHARMACEUTICALS2

. 6.10 While replying the specific query of the Committee about the drug price controlsystems in other countries, the Department of Chemicals and Petrochemicals submitted

the following details in a written note: -

Price control in one or other form is exercised in all the countries. In the developedcountries it is exercised through reimbursement scheme and through Insurance Scheme.

The feature of the various methods used are as follows: -

(a) Cost Plus

The Cost plus method bases permitted rise on the cost of production, allowance being

made for marketing and R&D expenditure. The low ratio of direct cosst to total cost inthe pharmaceutical industry makes the cost plus pricing method potentially a difficult

technique to apply without any bias.

(b) Internal Comparison

In this system prices are fixed by reference to comparable drugs already on the nationalmarket, concessions being made to innovative products with therapeutic advantages.

This means that similar products will be similarly priced leaving little room for price

competition. In this system the prescribing freedom of the Doctors is not compromised.The prices of new drugs in which there is no equivalent on the national market may be

determined by using the price in another country. Spain, Luxembourg and Portugal

follow this system.

(c) External Comparison

In external comparison the price of a particular medicine in other countries is taken asthe standard. In Ireland, for example, external comparison is used by linking local prices

to a Five country formula.

In most of the member states of the European Community, pharmaceutical expenditure is

also controlled by one means or the other. Two principal ways of curbing expenditure is

by reimbursement control or cost containment. The methodologies used are as under: -

2 Extract from Chapter VI ofReport on Pricing and Availability of Drugs/Pharmaceuticals, Ministry ofChemicals and Fertilisers (Dept of Chemcials and Petrochemicals), 15th Report of the Standing Committee

on Petroleum and Chemicals (August 2001), Thirteenth Lok Sabha , Lok Sabha Secretariat, New Delhi.


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(a) Positive List

A positive list contains those drugs for which reimbursement is being made partly or

wholly by the Government. In countries with product-by-product price control, a positive

list is a integral part of the price control.

(b) Negative List

A negative list is a list of those drugs which are not reimbursed at all. An inclusion ofany drug under this list automatically results in non-prescription of this drug.

(c) Reference Prices

In this method the reimbursement limit for a group of identical or equivalent products is

fixed. Reimbursement is made only on the basis of the reference price and any higher

price has to be borne by the patient.(d) Volume related price

Under this method, practiced in France, in order to tackle new mega priced drugs, a sales

volume is fixed. Should actual sales exceed the forecast sales volume, the price will have

to be reduced through negotiations between the authorities and the manufacturer.

(e) Promotional Expenditure Control

Through this method an attempt is made to keep the promotional expenditure under

control either by imposing a tax on such expenditure or by restricting the amount that can

be spent on promotion expenditure.

(f) Transfer to OTC status

This is an alternate to the negative list because one a drug is specified as an OTC drug,the consumer has to meet the entire cost.

(g) Economical prescribing habits

In some countries the authorities have tried to promote economical prescribing habit in

order to encourage pricing of cheap, safe and effective drugs. This is achieved buypublishing an essential drug list or by prescribing disincentives for Doctors who are

found to be exceeding the average price for drugs prescribed.


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(h) Percentage of co-payment

In a number of EC countries, the patient is obliged to pay a percentage of the cost of the

drugs prescribed. In some countries the percentage is linked to the financial and medical

condition of the patient.

6.11The Department has submitted a statement showing the drug price control systemsin European countries as under: -

Country Individual drug Basis

Price control

Belgium Yes Internal comparison (cost plus)Denmark No Reimbursement control-reference price system

France Yes Internal comparisonGermany No Reimbursement control-reference price systemGreece Yes Cost-plus for locally produced, external

comparison for new drugs.

Ireland Yes External comparison

Italy Yes Internal comparison (cost-plus)Luxembourg Yes External comparison (Belgium)

Netherlands Yes Reimbursement control-reference price system

Portugal Yes External comparisonSpain Yes External comparison but control of profit

Company-by-company

U.K. No Rate of return fixed company-by-companyThrough negotiations with the D/o Health, UK

Austria Yes External comparison, (cost-plus)

Finland Yes External comparison, (cost-plus)

Sweden Yes External comparison, (cost-plus) profit margins

6.12While analyzing some prominent pricing system, the Department submitted thefollowing details: -

The Japanese drug pricing system has to be viewed in the background of the existing

medical insurance system. The National Health Insurance Drug Price list is an itemizedlist of pharmaceutical products which can be used for insurance of medical care. Based

on surveys the list is revised periodically. The list contains approximately 13,500 drugs

and the Drug Price Calculation method is laid down by the Chuikyo (The Central Social

Insurance Medical Council).

China follows the cost plus system for fixing prices of drugs. The State Administration

or Prices analyses the cost of production of a particular drug as conveyed by the factory


21/27

which manufactures it and adds an acceptable level of profit margin to it to arrive at a fair

price. This fair price is conveyed to the State Administration of Pharmaceuticals and to

the sub-office of the State Administration of Pharmaceuticals, who specifically deal withthe price of a drug. The official price of each drug is finalized after the approval has been

obtained form the State Administration of Pharmaceuticals which is an independent

office under the State Council.,

Canada has set up the Patented Medicine Prices Review Board which ensures that the

prices of patented medicines are not excessive. The board is an independent autonomous

and quasi-judicial body and the Government has no power to direct it. The boarddetermines if the price is excessive by applying the reasonable relationship test, the

therapeutic class comparison test, the international prices comparison test or by

comparing the change in prices with the change in the consumer price index over aspecified period

6.13 When the Committee enquired about the criteria for deciding the drugs to be

included under price control or keeping them out of it, the Department of Chemicals &Petrochemicals submitted the following details:-

The criteria are:-

(i) The criterion of including drugs under price control will be the minimumannual turnover of Rs. 400 Lakhs.

(ii) Drugs of popular use, in which there is a monopoly situation will be keptunder price control. This purpose if for any bulk drug, having as annual

turnover of Rs. 100 lakhs or more, there is a single formulator having 90% ormore market share in the Retail Trade (as per ORG) a monopoly situation

would be considered as existing.

(iii) Drugs in which there is sufficient market competition viz. at least 5 bulk drugproducers and at least 10 formulators and none having more than 40% market

share in the Retail Trade (as per ORG) may be kept outside the price control.

However, a strict watch would be kept on the movement of prices as it is

expected that their prices would be kept in check by the forces of marketcompetition. The Government may determine the ceiling levels beyond which

increase in price would not be permissible.

(iv) Government will keep a close watch on the prices of medicine which aretaken out of price control. In case, the prices of these medicines rise

unreasonably, the government would take appropriate measures, including

reclamping of price control.(v) For applying the above criteria, to start with, the basis would be the data upto

31st

March 1990 collected for the exercise of the Review of the Drugs Policy.

The updating of the data will be done by the National Pharmaceutical Pricing

Authority.(vi) Genetically engineered drugs produced by recombinant DNA technology and

specific cell/tissue targeted drugs formulations will not be under price control

for 5 years from the date of manufacture in India.


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Manufacturers of price control drugs are allowed a post tax return of 14% on net worth or

a return of 22% on capital employed or in respect of new plant on internal rate of returnof 12% based on long term marginal costing depending upon their option.


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Document 3

SUMMARY AND RECOMMENDATIONS3

6. The group constituted by the committee to consider an appropriate methodology has

made the following suggestions, with which the committee agrees:

(i) The minimum MAT value of a brand for the purpose of determining the massconsumption nature of the drug may be considered as Rs. 10 crores.

(ii) Secondly, a brand with 10 percent or more share in a given category may betreated as having inadequate competition.

(iii) Identify the brands having MAT value of Rs. 10 crores and above with a shareof 10% or above in the group/category (there are approximately 180

categories in ORG). For this purpose, the March 1999 issue of the ORG-MARG Report which provides firm data for the year, 1998-99 be used.

(iv) Exclude all brands having Ayurvedic and other products which are notcovered under DPCO.

(v) Exclude the multi-ingredient based brand formulations(vi) List out the bulk drugs contained in each of the brand products so selected forthe purpose of identifying the bulk drugs to be included under price control.

(vii) From the list of bulk drugs so worked out, the low cost drugs may beeliminated on the basis of per day cost of a medicine worked out based on

the maximum retain price (MRP) of the top selling pack of the brand from

which the concerned bulk drug was identified. As stated earlier, the per daycost of a medicine should not exceed Rs. 2.00 for being considered as low

cost medicine.

7. The committee recommends that the above methodology be adopted for

identification of specific bulk drugs to be put under price control. Accordingly, the

Government would need to undertake an exercise to arrive at a list.

3 Reproduced from Report of the Drug Price Control Review Committee, Dept of Chemicals andPetrochemicals, New Delhi, October 1999. Extracts from Chapter VI of the Report.


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Document 4

Price trends of Some Top Selling Drugs (In the Group/sub-group)

Period: January 1995 and June 1999)4

S.

No.

Product

Name

Company Pack

Size

Group

Name

Price

Rs.Jan.95

(as per

ORG)

Price

Rs.June 99

(ass per

ORG)

%

change

1 Strepsils Boots 8s Cough & C

old

1.03 6.13 495.15

2. Pyridium Parke

Davis

10s Urinery

Antiseptic

4.02 18.71 365.42

3. Mikacin Aristo 2ml/

500mg

Antibiotic 13.32 47.49 256.53

4. Vicks Inhaler Procter 1s Inhalents 4.51 15.86 251.66

5. Domstal Torrent 30ml Anti

Hystamine

5.32 18.62 250.00

6. Vibazine Medibios/P

ZR

8s Antibiotic 16.05 48.53 202.37

7. Cephaxin Biochem 1gm Antibiotic 47.00 135.23 187.72

8. Fifol-Z SBP 30s Anti

Anaemics

15.48 42.95 177.45

9. Vick Action

500

Procter 8s Anti Cold 3.42 8.31 142.98

10. Daflon-500 Serdia 10s Vasoprotec

tives

50.96 120.13 135.73

11. Stibanate Gluconate 30ml Anti

parasitic

30.24 66.50 119.91

12. Isokin Parke

Davis

300mg/

10s

Anti TB 2.63 5.78 119.97

13. PZA Ciba Novartis 750mg/

10s

Anti TB 22.48 42.66 89.77

14. Banocide Glaxo 10s Anti

Filarals

1.56 2.94 88.46

15. Zandu Balm Zandu 10gm Rubs &Pain Balms

5.85 10.85 85.47

16. Perinorm IPCA 10s Anti

Emetics

4.00 7.29 82.25

17 Daonil Hoechst 5mg/ Anti 2.64 4.78 81.06

4 Reproduced from Table 5.3, DPCRC Report, 1999, page 93.


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10s diabetic

18 Combutal Lupin 800mg/

10s

Anti TB 15.21 26.72 75.67

19 Broadicillin Alkem 1 Vial/

500mg

Ampicillin

Injectable

8.26 13.07 58.23

20 Tenoric IPCA 10s Hypotensive with Di

10.75 16.31 51.58


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Difference in prices of formulations based on same bulk drugs5

S.

No.

Manufacturers Formulation/P

roudct

Composition Pack MRP Batch

No.

Date

1 Pfizer Vicon 250mg Azythomycin

Cap

6s 233.38 820-

64001

May 98

2 Alembic Abithral Azythomycin

Cap

6s 143.40 81007 June 98

3 Pfizer Amloged 5mg Amlodipine

Besylate

10s 47.82 820.05

008

June 98

4 Intas Pharma Amtas-5 Amlodipine

Besylate

7s 9.00 8006 June 98

5 Unichem Ampoxin 500 Ampicillin250

Cloxacillin 250

10s

Al/St

42.92 BB898

6

July 98

6 Glaxo Fortum 1 gm

Inj.

Ceftaridine 1gm 341.92 N634 June 98

7 Lupin Tirime Ceftaridine 1 gm 299.00 72001 May 97

8. Pfizer Magnamycin

Inj.

Cefopersason

Sod. USP

1 gm 265.14 80735

054

March 98

9. Panacia Myficef Cefoperason

Sod. USP

1 gm 170.00 LD402

2

Dec. 97

10 Johnson &

Johnson

Risperdal Resperiodone 1

mg

10s

Al/St

127.35 006 3/98

11 Torrent Pharma Respidon Resperiodone

1mg

10s 18.55 BN10

01

Apr. 97

12 Protecter Risnia-1 Resperiodone 1

mg

10s 7.00 A7029

9

Sep. 97

13 Glaxo Cetrizine Ceterizine

10mg

10s 26.70 1037 Aug 98

14 Lupin CZ-3 Ceterizine

10mg

10s 7.70 8087 08/98

5 Reproduced from Table 5.4, DPCRC Report, 1999, p.94.


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Difference between wholesale price and MRP (%)6

S.

No.

Company Drug Packing Wholesale

Price (Rs)

MRP (Rs) Margin

(%)

1 Wings

Pharmaceuticals

Tetracycline Caps

250 mg 10 x 10

10 x 10 52.11 130.00 150.00

2 ____Generics Inj. Dexa____ Sod.

Phos

10ml vial 11.75 33.00 181.00

3. Ind. Swift Ltd. Inj. Gentamuycin

(as sulphate)60mg/2ml

10ml vial 10.89 25.00 130.00

4 Ind. Swift Ltd. Switax 500mg(cofetoxlime Sod)

Vial 24.81 50.00 101.00

5 Ind. Swift Ltd. Amyclox 500(Amoxycillin

250mg+ Ciprollox

500mg

10 x 10 296.45 710.00 139.00

6 Max India Ltd. Ciprollox 500mg 10 x 10 235.00 616.00 182.00`

7 Max India Ltd. Tetracyucline

250mg Cap

10 x 100 620.00 109.12 76.00

8 Max India Ltd. Inj. Cefatoxime Vial 38.25 80.32 110.00

9 Wockhardt Inj. Gentamycin 10ml vial 9.78 30.00 206.00

10 Wockhardt Cap. Ciprollaxcin250 mg

10 tab 13.09 53.00 305.00

6 Reproduced from Table 5.6, DPCRC Report, 1999, p.95.